After years of waiting for its DC plan members to turn into amateur investment managers, Marc Poupart, divisional vice-president, pension and retirement programs, with Hudson’s Bay Company (HBC), says the organization realized it was time for a change.
In the past, HBC’s approach was to provide limited investment choices to the 26,000 active members and the 10,000 deferred members in its DC plan, which began 25 years ago and includes approximately $600 million in assets. Current options for members include traditional balanced, Canadian equity, international equity and fixed income funds, with GICs and money market choices for those nearing retirement.
The problem, explains Poupart, is that, by choice or by design, as many as 55% to 60% of plan members decided to stay in the default balanced fund.
After identifying issues around apathy and lack of investment expertise (e.g., low general statistics of member investment changes per year), HBC took a step back more than a year ago to analyze its best investment approach for its plan members.
“We had been looking at lifecycle/target date funds [TDFs], since this was the natural extension of our current default, a balanced fund. The thought was, although the balanced fund had equity exposure, it did not change as members got closer to retirement and, as such, could [create] greater risk. Conversely, at younger ages, our members could probably take on more risk since their savings were small and they had the latitude of time to recover should the markets deteriorate,” Poupart explains.
The first step in moving toward a change was to evaluate whether TDFs or lifecycle funds were the appropriate solution. This involved consultations with HBC’s actuarial firm, which performed an analysis based primarily on its general surveys on industry trends. Poupart also held an education session for HBC’s pension committee, to outline why this change was important given current market conditions. “[The committee] fully embraced it. That’s why we’re moving ahead now.”
A fresh design
On September 1, the company is set to change its investment platform—replacing the default balanced fund in its DC plan with a lifecycle solution, where the main features are automatic asset rebalancing every quarter as well as automatic lifecycle movement every five years based on the plan member’s age.
Poupart says the decision to go with a lifecycle fund as opposed to a TDF was partly a result of perception. Although both products are similar in establishing a glide path (which changes the risk over time), he says that a target date approach requires the member to select a retirement date. “Our experience with members and industry comments led us to believe that members are reluctant to make decisions, and setting a realistic retirement date creates uncertainty.” On the other hand, he calls lifecycle more of a “today” decision, as it is often driven by the member’s current age.
Poupart explains that the lifecycle approach represents a series of balanced funds that change over time, with a bit more equity risk included in younger employees’ portfolios and a reduction in that risk as members near retirement. “It’s really an extension of what we have now. We’re basically saying it’s a balanced environment, but it moves and rebalances.”
Open architecture
After HBC went to market to examine the lifecycle and TDF products available, it was able to confirm that Standard Life—with which it has an existing decade-long relationship—was still its best recordkeeper choice.
HBC, therefore, will be using Standard Life’s lifecycle platform, which Poupart praises for its open architecture approach.
Essentially, says Poupart, Standard Life has created a fund of funds for each lifecycle. Each of these fund of funds can be populated by different asset classes and by any fund/manager that HBC chooses. For example, for members under 30, the asset mix would be 14% Canadian bonds, 25% Canadian equity, 51% global equity and 10% specialty. HBC was able to set the percentage for each asset class, in concert with Standard Life and the actuary’s investment consulting group. HBC’s platform will use eight lifecycle fund of funds in total.
“HBC was able to pick specific managers for each asset class and, as such, leverage assets, including our DB plans, to negotiate better fees. In turn, this allows us to pass such savings to members.”
With open architecture, Poupart says HBC will be able to include more specialty investments (e.g., real estate) into the new platform, as well as introduce other asset classes as they become available.
However, the plan will initially take a more passive investing approach, says Poupart, because, given the current markets, it became apparent that active managers were having difficulty providing returns in excess of benchmarks on a consistent basis.
Those members who are investment-savvy and want to make their own decisions can still opt out of the lifecycle approach; the plan will offer limited à la carte components, allowing members to build the portfolio they want.
“As a sponsor, we’re saying we think [the lifecycle approach] is the right thing, but we don’t know the circumstances of each individual,” says Poupart.
Reaching out
While HBC had been considering changing its investment options for the past couple of years, Poupart says that actually making such a change is challenging in a plan the size of HBC.
Perhaps the biggest difficulty, he says, is in ensuring plan members across the country—including some 90 Bay stores, as well as Home Outfitters and Zellers locations—are equally informed.
To communicate the changes as clearly as possible prior to the September launch, HBC is using multiple methods—from letters sent to employees’ homes to webinars—to get the word out to members.
“We’ll basically migrate [members] to [the new default fund] unless they tell us otherwise,” explains Poupart. “The important thing is to make sure they understand how to opt out if they want to.”
While the company aims to provide a competitive compensation package, of which the pension plan is an important part, Poupart says HBC is also trying to support its employees so that eventually, when they retire from the company, they have enough money to do so.
“This will allow us to take the investment decision, I wouldn’t say out, but put it on the side a bit and then we’ll be able to focus on benefit adequacy.”
Although there are no plans to change the platform again over the next few years, Poupart says his team will do a follow-up once the launch is complete, specifically to see how many opted out of the lifecycle approach and why. “You evolve every day. That’s how we see it: it’s good for today; tomorrow, let’s make it better. So we’re looking at it constantly.”
Helen Burnett-Nichols is a freelance writer in Hamilton, Ont. burnett.helen@gmail.com
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